Monday, September 29, 2008

Bailout Goes Down, Takes Market with It

Well, as you probably know already, the bailout bill failed to pass the House today, by a vote of 205 to 228. Lawmakers from both sides are going back to the drawing board, with a two-day hiatus from active session to hammer out some details.

The market meanwhile, took notice: the Dow recorded its largest drop ever, falling 777 points, or about 7%. Ouch. My own beloved CapitalOne was not immune to investor sentiment, and dropped a whopping $10.55 per share, nearly 20%. Yikes!

So what happens now? Honestly, it's hard to say. I don't think I've ever lived through something that's so simultaneously urgent and important and complicated.

The bill that was put up for a vote wasn't the solution favored by most Democrats (or for that matter, most economists) because it left out stock warrant provisions that were anathema to large blocks of Republicans. Instead, it simply bought up the bad assets of participating firms, which was supposedly the only way to get a good level of bipartisan support, which leaders from both parties desperately wanted. But the Republican leadership couldn't deliver and about 2/3 of their caucus voted nay (a vote which, it should be said, is quite understandable given their prevailing laize fare approach to economics). So here's my prediction: the Democratic leadership reintroduces Rep Frank's bill, this time without the support of the Republican leadership. Frank's bill has stricter limits on executive compensation, a proviso for stock warrants, and most importantly, much stronger Democratic backing. The bill passes along a largely party line vote in the House, and then passes the Senate with a bit more ease given the different ideologies there. Bush, Paulson, and McCain all back it, giving it bipartisan cover.